Underappreciated Economists- John Exter

John Exter, founder of the Central Bank of Srilanka;

“The appointment of John Exter to a one man committee on the establishment of a central bank is also marked by an interesting legend. Edmund Eramudugolla, a former Senior Deputy Governor of the Central Bank, has narrated this legend in his Reminiscences of the Central Bank of Sri Lanka. According to him, the government of newly independent Ceylon decided to replace the Currency Board System which it had inherited from the British with a more flexible central bank. Accordingly, the government decided to seek foreign assistance to prepare a blueprint for a central bank based on the country’s specific position and future prospects. However, for reasons not very clear, this assistance was sought from USA and not from the UK, the traditional advisor of the country. Thus, the Federal Reserve Bank of New York was approached by the then Minister of Finance, J. R. Jayawardene, to obtain the services of a suitable consultant. The Bank, in turn, informed the government that it could not release its best consultant, namely, David L Gosse, for this purpose, because he had been occupied in some other assignment at that time. Gosse was considered the ideal expert for the job, because he already possessed the required experience for the job at hand by pioneering the work relating to the establishment of the Central Bank of the Philippines. However, Gosse was kind enough to recommend his assistant, John Exter, for the job. Hence, Exter was not the first choice, but an engagement done by default. Yet, the wisdom, erudition and professionalism shown by Exter in both making the recommendations and subsequent running of the Bank, is a testimony that he was the correct choice for the job at hand.

According to his own admission, the prospect for his fortune on gold dawned on him after a friendly debate he had in 1962 with his one time Harvard buddy and Nobel Laureate Paul Samuelson. In that debate on why the dollar was becoming weak and USA was losing gold, Exter gave his diagnosis which was based on his experience with the Federal Reserve System. “Paul, it is very simple. The Fed is printing too many dollars and they flow out of the country into foreign central banks who demand gold” Exter is reported to have said. But, Paul Samuelson did not accept it and wanted to explain the malady in terms of productivity differences between USA and other countries, namely, Europe and Japan. Samuelson’s thesis was that the latter category of countries had a higher productivity than USA and therefore the dollar was becoming weaker. Exter says that he countered Samuelson saying that Japan was in more trouble than USA, because “the Bank of Japan was running its printing press even faster than the rest of the central banks around the world” Exter had decided then and there that the irresponsible government expenditure by the Kennedy administration could not keep the dollar stable in the long run and one day, gold would become the preferred asset by the world’s nations. Hence, he says that he converted all his savings into gold based assets and waited patiently. He was amply compensated in 1971 when the US government was forced to sever dollar’s link with gold under the gold exchange standard and allow the gold prices to be determined in the free market. Overnight, gold prices doubled from $35 per ounce to $70 per ounce. So did the gold based assets portfolio held by Exter."

Related;
A Moneychanger Interview: Mr. John Exter

"I’ve battled Friedman more than Samuelson, mainly because Samuelson has been a professor all his life. Friedman left the University of Chicago & went out to the Hoover Institute at Stanford. We’re both members of the Mont Pelerin Society; he is a past president & one of the founders. Many in the Mont Pelerin Society are on my side, but a majority of the members are monetarists, i.e., Friedmanites. Friedmanism dominates Mont Pelerin Society meetings. There are no Keynesians of whom I am aware."

Speech by The Rt Hon Eddie George, Governor

In his Report - published in November 1949 - Exter presented a draft bill accompanied by a commentary. It is still well worth reading. In that commentary Exter first outlines the case for the new central bank being "non-political" and having "a considerable amount of independence" - essentially on the grounds that central banking "puts the government into the business life of a country at especially critical points, namely banking and other credit activities, capital markets, foreign exchange markets and the supply of currency," and that it "embraces problems which are of an unusually technical nature"!

But Exter goes on to recognise that "there are many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government". Noting that many governments had learned to value the sort of independent and objective, detached, advice that central banks are able to give, Exter nevertheless acknowledges that "on matters of vital interest to the state it would be impossible for a central bank to adopt a policy contrary to the policy of the Government of the day." His killer argument is that no central banker can help but be "acutely conscious of the fact that, since no Parliament can bind its successors, their independence is limited by the ultimate power of the Government to change the law".